In the wake of the pandemic, many small business owners are looking for ways to increase cash flow and decrease debt obligations. Refinancing an expensive loan is a great way to reach these goals. Make sure you go into the process knowing the risks and rewards. Here’s information to consider when you’re exploring solutions to your existing business debt.
Although consolidation and refinancing may sound like the same thing, they are different. Each has a different strategy to manage debt.
Loan consolidation: The concept of consolidation is bundling separate loans together so you can handle with one payment. It’s a good way to simplify your monthly obligations but doesn’t necessarily save you money.
Refinancing: This strategy is replacing one or more loans with an entirely new loan, ideally one with better rates and terms. The new loan will pay off the expensive loan, leaving you in a better situation. Refinancing is by far the better way to save money.
Here are reasons a consolidation might be a good fit for your unique business:
Ask yourself the following important questions:
It is also worth mentioning that there are debt refinancing offers that sound too good to be true. And it's typically because they are. Debt cannot simply disappear. Companies that offer to consolidate all your loans and sell them may be making an impossible promise. Before you refinance your loans, make sure you know the background of the lending institution and investigate exactly how its debt-refinancing plan works. Avoid scam artists who can lead you into an unrealistic - and costly - debt elimination program. Consider an SBA loan if you are qualified.
Before you jump into the process, determine if you’re qualified for a money-saving solution.
There are lots of advantages to a debt refinance with a lower rate loan.
A rate refinance can help you divert more money toward your debt without changing your principal balance. This can help you better manage your finances and pay down debt.
Longer terms equal small payments. This can reduce your monthly debt obligations, strengthening cash flow.
If qualified, you can get a loan larger than the debt you’re refinancing. That extra money can go towards a multitude of business building initiatives like purchasing inventory or increasing marketing.
There are a few negatives that come with a debt refinance:
If you want to pay off your debt early, you might find that prepayment penalties cancel out the benefits of the loan.
Make sure you a very clear on the rates, terms, and prepayment penalties when considering a refinance. This is when it’s important to work with a lender who has excellent customer service.
Here are steps to take to ensure that you have a smooth and effective experience.
Review your current loan balance and interest rate to get a handle on how much you owe and how much you would need to borrow to effectively pay down your expensive debt.
Although document requirement may vary from lender to lender, be prepared to submit information on the following:
You can apply for a refinance loan from the same lender who financed your original loan or find a new financial institution. Compare loan terms, fees, interest rates, and repayment schedules across various lenders.
SBA loans have some of the lowest interest rates and longest repayment terms. However, refinancing business debt isn’t a decision you should take lightly. To maintain the financial health of your small business, do your homework and be sure to work with a reputable lender.
Visit the SmartBiz Loans website for comprehensive information on SBA 7(a) loans: SBA Loans – The Gold Standard in Small Business Financing.